It has now been over three years since the Financial Conduct Authority (FCA) came into existence and took over responsibility to regulate financial firms from the Financial Services Authority, which was subsequently abolished.
The insurance profession falls within their jurisdiction and one of the issues on the regulatory agenda is potential excessive commission rates. Within this is the thorny issue of buildings insurance commissions and payments made to property managing agents or freeholders by insurance brokers when they place cover, who for many years treat this as a reliable and easy source of revenue.
The last time the issue hit the headlines was in December 2014 when the Competition and Markets Authority (CMA) asked the FCA to consider if the leaseholder market was being properly regulated, following a review of the residential property managing agents (PMA) sector.
The CMA’s 2014 report found that some insurance premiums could be distorted by potentially high commission rates included within the insurance companies premium rates paid to insurance brokers who may pay a portion of this commission to an introducer. These potentially excessive premiums were then passed onto leaseholders by the free holder (or property owner who took out the insurance). In some cases, these commissions were as high as 40%.
In its recommendations, the CMA proposed that property managers must disclose all information relating to the commission they earn. It said this could be implemented through codes of practice administered by the Royal Institution of Chartered Surveyors (RICS) and the Association of Residential Managing Agents which can expel or fine members.
Now with the CMA expected to shortly release an update to its recommendations, the issue could well move further up the FCA’s list of priorities. This is certainly becoming more topical so it would seem inevitable that the FCA will be addressing this issue.
The last time the subject of what was an “unreasonable” commission made the headlines was in 2011. A group of leaseholders in Kingston-upon-Thames won a four-year court battle with their freeholder who had been overcharging them for buildings insurance. The Leasehold Valuation Tribunal ruled that an insurance bill of £84,000, placed through one of Charter Quay’s managing agents that included 23.5% for commission was “excessive” and cut it to 10%.
Where a PMA or landlord is receiving a commission this must be commensurate with the amount of work done to earn this. If questioned by the relevant body, whether that be the FCA or the RICS, the PMA or Landlord must be able to justify this is fair and reasonable or risk the consequences.
As your insurance broker we have brought this to your attention as you receive a commission from insurance policies placed with James Hallam Real Estate. If you have any concerns or would like to discuss this further, please do not hesitate to contact us.
James Hallam Real Estate
13th September 2016